The business behind the show

Pandora ekes out unexpected profit for third quarter

November 22, 2011 | 3:45
pm

Online radio service Pandora Media Inc. posted a modest profit in its third quarter, beating most Wall Street analysts' expectations for the Oakland-based company.

Pandora recorded net income of $638,000 on $75 million in revenue for the quarter ended Oct. 31, compared with a net loss of $1.8 million on sales of $37.7 million the year before. On a per-share basis, however, the company reported a break-even quarter versus a 15-cent loss a year ago. Pandora gets the lion's share of its revenue, roughly 88%, from advertising. The remainder comes from subscriptions to its premium, ad-free service.

Analysts polled by Thomson One on average projected that Pandora would lose $1.2 million in the quarter on $71.4 million in sales.

Pandora warned investors Tuesdaynot to anticipate further profits for the remainder of the year. It forecast a loss of 2 cents to 4 cents a share for the current fourth quarter, leading to a full-year loss of between 2 cents to 5 cents a share.

The company's shares, which lost 67 cents to close at $11.85 Tuesday, shed an additional 43 cents in after-hours trading following its earnings release. The decline in Pandora's share price was largely due to investor concerns over the firm's high costs of licensing the songs it plays to 40 million listeners who streamed 2.1 billion hours of music during the quarter. Pandora pays a royalty fee every time a song is played.

On the other hand, the company is making strides capturing listener market share among competitors including Slacker -- both online and vis-a-vis traditional broadcast radio. Pandora's share of online radio streaming climbed to 66%, up from 53% a year ago. When compared with over-the-air radio stations, such as those operated by Clear Channel Communications Inc., Pandora's share doubled to 4.3% from 2.1% a year earlier.

"That said, it's still just 4.3%," Pandora Chief Executive Joe Kennedy said in an interview. "We have a tremendous opportunity to expand our share, and we're continuing to invest in efforts to grow further."

Pandora has been working with automotive manufacturers to build its streaming radio service directly into new vehicles. Last week, Honda became the sixth major auto company to agree to integrate the service into its cars. Pandora also has deals with Ford, Toyota, BMW, Hyundai and General Motors, which will gradually roll out cars with the service in coming years. Pandora is already integrated into the Ford Scion and the Toyota Camry.

Getting into cars is a critical step for Pandora to compete with broadcast radio for the $17-billion radio advertising business.